Upcoming stagflation
Inflation in the US is at its highest level since the 1980s, but the Federal Reserve is far behind the curve despite the fact that on Wednesday they raised the key interest rate by 50 basis points, which is the largest interest rate increase in 20 years. However, much more work will be required if they are to succeed in combating rising prices with austerity monetary policy.
Inflation in the US is at its highest level since the 1980s, but the Federal Reserve is far behind the curve despite the fact that on Wednesday they raised the key interest rate by 50 basis points, which is the largest interest rate increase in 20 years. However, much more work will be required if they are to succeed in combating rising prices with austerity monetary policy.
At the same time, the S&P 500 has already fallen almost 13 percent so far this year, and the outlook for the economy remains bleak after US GDP shrank by 1.4 percent in the first quarter. However, the market reacted positively to Powell's statement that an increase of 75 basis points at a time is not yet on the map.
Until the second half of last year, inflation was limited to asset prices. For those who have owned shares or properties in recent years, the return has been well above a longer average, but with future interest rate increases and recession, it is unclear whether the price party will continue.
During his years as Fed chief, Powell has more than proven how skilled he is at managing the market and its expectations, but the future looks uncertain. With inflation well above the Federal Reserve's own target and potential recession around the corner, there are few tools to turn to. The key interest rate is still relatively low, and with shutdowns in China, we see continued obstacles in deliveries of goods worldwide.
Now the risk of stagflation, ie high inflation with high unemployment, is imminent, and despite the S&P 500 rising on relief after Powell's speech yesterday, it is not certain that the rally will last longer than it did before it fell around 10 percent in April.
In a stagflatory environment, there are a few assets that have historically performed well. As corporate profits can be expected to fall in such a situation, and Federal Reserve assistance may be lacking in an attempt to combat high inflation, the high-risk portfolio today should consider allocating a portion of its capital to commodities that are already in short supply in the world.
Risks
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